In a previous blog, I wrote about some non-tax related small business estate planning issues to consider upon the death of a sole proprietor. In this blog, I wanted to touch on some non-tax issues affecting owners of small businesses that are structured as either partnerships or limited partnerships.
A partnership is established when two or more people agree to pool their financial, managerial, and technical resources in order to operate a business for profit. The terms and conditions of a partnership are dependent upon the agreement of the parties. Specific provisions may or may not be provided for in the event of the death of one of the partners or they may also be provided for by applicable legislation. Note that section 33 of the Partnerships Act (Ontario) provides that “subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or insolvency of a partner.”
A limited partnership is a special form of partnership whereby one of the partners is designated as the “general partner” and all other investors are usually designated as “limited partners”. Again, the terms and conditions of the limited partnership, and the manner in which the interests of a limited or general partner are to be dealt with upon his or her death, will largely be dealt with in the limited partnership agreement, although they may also be provided for by applicable legislation. Note that the Limited Partnerships Act (Ontario) provides for the following provisions with respect to the death of the general or limited partner:
- section 21 provides that the death of a general partner (or the dissolution of a corporate general partner) dissolves a limited partnership unless the business is continued by the remaining general partners pursuant to a right to do so contained in the partnership agreement and with the consent of all the remaining partners; and
- section 22 provides that the executor or administrator of the estate of a limited partner has all the rights and powers of a limited partner for the purpose of settling the estate of the limited partner; and whatever power the limited partner had under the partnership agreement to constitute the limited partner’s assignee a substituted limited partner.
The potential impact of relevant statutory provisions, as well as any relevant provisions of the partnership or limited partnership agreement, should be borne in mind when considering estate planning issues for small business owners whose businesses are structured as partnerships or limited partnerships.